Displaying items by tag: ETFs

According to Russell Investments, the outlook for active fixed income looks quite attractive in 2023. They see opportunities to outperform benchmarks due to market and trading inefficiencies, index construction, and a volatile macro environment due to the lack of clarity around the Fed’s hiking schedule.

Compared to active equity funds, they see more opportunity for alpha in active fixed income for a variety of reasons. A major one is that fixed income indices are constructed with thousands of securities, often with different durations, coupons, and covenants. For astute managers, this can create opportunities to uncover value especially amid rating changes, new issues, and rebalancing by indexes. 

Another favorable factor is that many participants in the fixed income market are not focused on maximizing returns. Instead, there are forced buyers of fixed income due to capital requirements like insurance companies and banks. Further, central banks remain active in these markets as well, and they telegraph their intentions well in advance. 

Finally, there are simply more inefficiencies in fixed income as the vast bulk continue to be traded over-the-counter which leads to less price transparency and wider bid-ask spreads. 

Finsum: Russell Investments sees opportunity for investors in active fixed income funds due to more inefficiencies, less transparency, and more opportunities to uncover value..

In an article for the Financial Times, Henry Timmons discussed the positive effects on bond market liquidity due to the increased proliferation and use of fixed income ETFs. 

In essence, the innovations that have already led to more liquid and transparent markets in stocks and commodities are now happening in the fixed income markets. Despite waves of financial innovation, the bond market has been slow to adapt until recently. 

Some reasons for this are capital requirements at large banks leading to less inventory of corporate bonds on dealer balance sheets, central banks vacuuming up massive swathes of government and mortgage debt, and market participants who were resistant to change.

However, this state of affairs is being disrupted by ETFs which trade on exchanges and have tighter bid-ask spreads than what is found in individual bonds. In fact, many now look at fixed income ETFs for price discovery due to these factors. 

Of course, there are some detractors who contend that liquid fixed income ETFs which hold illiquid bonds could lead to financial instability in the event of a market downturn. Yet, fixed income ETFs were resilient in 2022 which was the worst year for bonds in decades.

Finsum: Fixed income ETFs are rapidly growing and having positive effects on bond market liquidity even if the underlying bonds remain illiquid.

Rain, shine or, well, active fixed income ETFs.

Point is, in light of tumultuous market conditions, it appears the time’s right for then to shine, said Jason Xavier, head of EMEA ETF Capital Markets, according to global.beyondbullsandbears.com.

“Active, active, active! Everywhere we turn, we are hearing that a new dawn is upon us, and it is once again the time for active management,” he said. “Many would be surprised that I totally agree. As outlined in my 2023 predictions, one could argue the decade of ‘cheap’ money and record-low interest rates has passed, and those skilled enough to navigate these volatile markets will certainly do well.

That said, he sees plenty of potential down the line: the dawn of the active fixed income In the ETF vehicle. The ongoing assumption that ETFs are solely passive vehicles? Mythical, said Xavier, noting ETFs are forever evolving. In doing so, they’re helping address developing investor needs. Not only that, a range of ETFs now are offered by asset managers.

With the reemergence of the chance for active management, one thing’s obvious, he noted: significant expansion should be in the cards for active ETFs—and in particular active fixed income ETF.

Meantime, in the aftermath of a topsy turvy time last year, Treasury yield is on a terrain unsees in well over 10 years, according to mfs.com.

The driver: higher as well as stickier inflation than anticipated, not to mention big time uncertainty revolving around the pace and depth of tightening by the central bank. Global markets absorbed a bruising. Income, today, has returned to fixed income.

Last month, investors must have spent more than a little time at their neighborhood ATM. After all, during that period, they poured $62.1 billion into ETFs, according to zacks.com.

That’s setting some pace, at that, considering it’s almost tripled February inflows, according to the BlackRock report. The first quarter net inflows as a result: $148.5 billion.

Fixed income ETFs fueled most of the inflows. Marking the largest gain since October, it hauled in approximately $38 billion.

Meantime, the Innovator, an outcome-based ETF issuer, recently was more than a little busy. It launched a unique suite of barrier ETFs that extends protection by scooping up U.S. Treasurys and selling equity options, according to cnbc.com.

“Advisors are realizing that bonds aren’t the safe haven that many thought they would be,” the firm’s CIO, Graham Day, told CNBC’s “ETF Edge.”  “If you can pair [a barrier ETF] with the fixed income, it offers a tremendous amount of diversification benefits.”

And talk about two birds with one stone. These ETFs nip credit risk in the bud and yield liquidity every day, Day explained.

In an article for ETFTrends, Mark Hackett discussed whether fixed income can rally given the backdrop of rising inflation and rates. These are potent headwinds for the asset class given that both factors reduce the value of future income and principal. 

Of course, this is a major change after a decade of zero percent rates and inflation under 2%. Under these macro conditions, fixed income consistently delivered strong returns for investors with minimal volatility. In addition to these headwinds, there is also an increase in geopolitical tensions, re-shoring of supply chains, a nascent banking crisis, and a slowing economy which could stumble into a recession.

Despite these challenges, investors should still retain a considerable allocation to the asset class. In fact, fixed income has performed well since the middle of 2022 especially as inflation is trending lower, while the market is pricing in rate cuts by the end of the year. Additionally, fixed income is offering yields that are above that of equities. 

Due to these developments, fixed income investors can earn above-average returns with minimal risk given the yields in short-term Treasuries and corporate debt.

Finsum: Fixed income ETFs struggled in 2022 due to rising rates and inflation. Despite some headwinds, there are some silver linings for the asset class.